In the interwar period, the Royal Italian Navy (Regia Marina) had been designed to fight the French navy in surface naval battles reminiscent of the 1916 Battle of Jutland. On the eve of World War II, the navy began transforming itself, albeit unsuccessfully, into an "oceanic" navy that would not be confined by the British-controlled Mediterranean choke points of Gibraltar and the Suez. In the unlikely event that funding and resources were made available, the Italian navy by 1942 would include 9 battleships, 3 aircraft carriers, 36 cruisers (including 12 small Capitani Romani–class, of which 3 were completed before the armistice), and 84 oceangoing submarines. The navy had 5.4 officers for every 100 sailors (France had 7.5 and Britain 9.2 officers per 100 sailors), and many of the sailors were volunteers.

On the eve of Italy's 10 June 1940 entry into the war, the navy was consuming about 33 percent of the annual military budget, placing it well behind the army but ahead of the air force. The core of the navy was built around the new 30-knot, massive, Littorio-class battleships armed with 9 x 15-inch guns. Two were being completed when war was declared, and a third was added during the war. Italy also had two small, older, and completely rebuilt and speedy World War I–era battleships ready for sea and two others that were almost ready. Although they were the weakest Axis battleships of the war, they were more powerful than any cruiser.

Although it was a substantial force on paper, the Italian navy suffered from fundamental problems. Italy lagged in several key areas of naval technology. One area was sonar, which was just beginning to be introduced at the start of the war. Also, in the disastrous March 1941 Battle of Matapan, the Italians discovered to their dismay that the Allies had deployed radar on their warships. The Italians did not deploy their first warship radar until a year later, in March 1942. Ironically, Italy's scientific community had been working on radar in the mid-1930s, but the Italian government did not fully support its efforts. Of ultra intercepts, the Italians knew nothing, although they assumed the Germans were letting the Allies know about Italian operations, and the Germans assumed the Italians were doing the same.

Italian ship armor plate was inferior as judged by Allied standards. Italian heavy ships relied on long-range gunnery, but guns in cruiser and destroyer turrets were mounted too close to each other, thus interfering in the flight of shells, a problem compounded by an immoderate 1 percent weight tolerance for shells. This resulted in excessive salvo spreads, as opposed to the much tighter British salvos.

The Italians sought to avoid night fighting by their heavy ships, and the navy lacked flashless night charges for ships with 8-inch or larger guns, an error not rectified until 1942. The navy dropped night-fighting training for large ships in the 1930s, precisely when the British navy was adopting such tactics for its heavy ships, including battleships. Italian losses in night surface actions during the war would be heavy and almost completely one-sided.

Italy also experienced problems with its submarines. There were three classes of subs. The large oceangoing submarines were part of the new oceanic navy. Many were based out of Bordeaux, France. In 189 patrols, they sank over 500,000 tons of Allied ships, with another 200,000 tons damaged. They also conducted mostly ineffective runs to Japan for key war supplies, and they operated in the Indian Ocean and Red Sea. Medium and small submarines hunted closer to home. In the Mediterranean Sea, these classes conducted 1,553 patrols with dismal results when contrasted to the successes tallied by far fewer German submarines dispatched to that theater. This outcome was, in part, due to the Italian doctrine that called for submarines to submerge during daytime and wait for a target to come within range. The Italians eschewed attacks on the surface in wolf packs at night. Their torpedoes were reliable but had smaller warheads than those of most other nations, thus causing less damage. Despite its long coastline and its colonies, Italy had only 25,000 mines in 1939, and most dated of these from World War I.

In the 1920s, the Italians experimented with the snorkel, a tube to the surface that allowed submarines to secure air while submerged, but they ultimately dropped its development as a dead end. Their submarines also suffered from slow submerging speeds—they were two or three times slower than German boats. Italy also had to rebuild many of its submarines during the war because their large sails (the superstructure where the surface bridge and periscope were located) were easily picked up by radar. Italian periscopes were too short, and the Mediterranean itself was a much clearer sea then the Atlantic, which made it easier for Allied pilots to locate submerged submarines.

Italy also failed to develop the aircraft carrier. Italian dictator Benito Mussolini and the navy High Command believed that the country's long coastline and the many Italian islands and bases in the central Mediterranean rendered aircraft carriers unnecessary. But the slow communication and response between the Italian navy and air force, fueled by interservice rivalries, meant that too few planes arrived too late too often: early in the war, Italian planes actually attacked Italian ships several times. High-level bombing of warships under way also proved to be ineffective. Mussolini changed his mind about the aircraft carrier, and during the war, he twice intervened personally to secure the conversion of two passenger ships to carriers, although neither was completed before the end of the war.

Italy also failed to develop torpedo-bombers before the war, in large part because of interservice jealousy. The air force, with only limited funds, opposed development of torpedo-bombers, preferring to use the money for high-altitude bombers. So although the Italian navy developed a torpedo for air launch, it was not until the war was several months old that the air force carried out its first torpedo attack. In the course of the war, the Italians achieved several successes with these airplanes.

The most innovative naval arm was the "x" mas (Decima Mas). This unit was made up of (1) midget submarines; (2) underwater swimmers trained in sabotage; (3) surface speedboats filled with explosives and piloted by crewmen who jumped off shortly before the vessels hit their targets; and (4) the slow-moving torpedo, or SLC, which was ridden by two men under water into enemy harbors. The most successful of these weapons was the SLC, directly developed from a World War I weapon that was employed against Austria-Hungary with good results; it was usually launched from a submarine. The most spectacular success for the SLCs occurred on 18 December 1941, when three of them entered Alexandria harbor and crippled the British battleships Queen Elizabeth and Valiant. With the exception of the midget submarines, the naval High Command ignored these weapons until 1935 and then only grudgingly supported junior officers involved in innovative development. A more forceful development program begun after World War I might well have made an important difference in World War II.

In spite of these limitations, the fuel-strapped Italian navy fought bravely during the war and transported to Africa 85 percent of the supplies and 92 percent of the troops that left port. In numerous battles above, on, and below the seas, the navy sank many Allied warships and forced the British to maintain a powerful naval force at both ends of the Mediterranean. In September 1943 when Italy switched sides in the war, the bulk of the Italian fleet joined the Allies.

Italian naval losses before the armistice consisted of 1 battleship, 11 cruisers, 44 destroyers, 41 large torpedo boats, 33 MAS-style PT boats, 86 submarines, and 178 other vessels. After the armistice, Italy lost 1 battleship, 4 destroyers, 5 large torpedo boats, 25 MAS boats, 3 submarines, and 23 other vessels. Mussolini's Italian Social Republic, organized in north Italy, seized some Italian warships, and most of these were subsequently sunk; the most important was the heavy cruiser Bolzano. Total wartime personnel losses for the Italian navy came to 28,837, with 4,177 of this number occurring after the armistice. Up to the armistice, Italy also lost 2,018,616 tons of merchant shipping.